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||Neutral Citation Number:  EWHC 2 (Ch)
||Case No: HC 14 B 02271
IN THE HIGH COURT OF JUSTICE
||Civil Justice Centre
1 Bridge Street West
Manchester M60 9DJ
B e f o r e :
HIS HONOUR JUDGE PELLING QC
SITTING AS A JUDGE OF THE HIGH COURT
|| MIKE HILTON
(Representing himself and the other members of D IV LLP identified in Annex 1)
PHILIP STEPHEN BRADLEY
(Representing himself and the other members of D III LLP identified in Annex 1)
(Representing himself and the other members of D II LLP identified in Annex 1)
(Representing himself and the other members of FDP LLP identified in Annex 1)
||- and -
||D IV LLP
D III LLP
THE FILM DEVELOPMENT PARTNERSHIP LLP
BIRD & BIRD LLP
Mr Glen Davis QC and Mr Matthew Abraham (instructed by Grosvenor Law) for the Claimants
Mr Peter Knox QC (instructed by the Law Department) for the First to Fourth Defendants
Mr Andrew Ayres (instructed by Triton Global Limited t/a Robin Simon) for the Fifth Defendant
Hearing dates: 4-5 and 8 December 2014 (Rolls Building) and 12 January 2015 (Manchester CJC)
HTML VERSION OF JUDGMENT
Crown Copyright ©
HH Judge Pelling QC:
- The first to fourth defendants ("the defendants") are limited liability partnerships formed for the purpose of carrying on unregulated collective investment schemes that enabled high net worth individuals to invest in film and television productions. There were approximately 240 individual investors in the schemes operated by the defendants. They invested about £75 million. 103 of those investors are represented by the claimants.
- The fifth defendant ("D5") is a solicitors' practice which currently holds a large quantity of documents that belong to the defendants. D5 came into possession of the documents some years ago when it was instructed to act on behalf of the defendants in a tax appeal that I describe in more detail below. It is no longer instructed by the defendants. I make clear at the outset and for the avoidance of all doubt that no allegations of wrong doing of any sort are made by any of the other parties in these proceedings against D5.
- The defendants were established by three individuals being Mr Keith Haley, Mr Robert Bevan and Mr Charles Savill. Criminal proceedings have been commenced against these and other individuals arising out of the formation and/or operation of the schemes by the defendants. The trial is due to take place in the second half of this year. Many allegations of wrong doing are made by the claimants in these proceedings that may feature in the criminal proceedings. I make clear at the outset and for the avoidance of all doubt that it is not the function of these proceedings to determine those allegations. Where I recite the allegations made by the claimants hereunder, I do so only to the extent that it is necessary to make intelligible the claims made in these proceedings and my conclusions in relation to them. I emphasise that they are merely allegations in respect of which no determinations have been made. Whether and if so to what extent the allegations can be made good is exclusively a matter for other courts and tribunals on other occasions.
- This is the hearing of a Part 8 Claim by which the claimants seek a declaration that they are entitled to inspect and copy the documents in D5's possession either as of right on a true construction of the deeds governing the affairs of the defendants or by operation of the Limited Liability Partnership Regulations 2001 ("the Regulations"). This is disputed by the defendants on the grounds that the relevant parts of the Regulations either do not apply or have been excluded by the deeds and, on a true construction of the deeds, the claimants are not entitled to either inspect or copy the relevant documents.
- In the alternative, the claimants claim Norwich Pharmacal relief against D5. D5 is neutral though it has attended by counsel and made submissions as to the applicable principles. The defendants oppose that application as well (even though strictly, they are not parties to it) on the grounds that on proper analysis the requirements for such an application to succeed have not been made out.
The Schemes operated by the defendants.
- The schemes were devised by Messrs Hayley, Bevan and Savill in their capacity as the controllers of Little Wing Films Limited, and promoted by them in that capacity to Independent Financial Advisors who in turn promoted the schemes to their high net worth clients, primarily as a legitimate tax mitigation scheme though one that might result in profits from the business carried on in due course.
- In order to be attractive as a tax saving scheme the schemes had to be structured so that tax savings exceeded the sums invested by the investor personally. Most schemes of this sort were structured in such a way that limited recourse or non-recourse loans were provided to investors that allowed them to make a geared investment with little or no risk. Lenders would be suggested by the promoters of such schemes. The schemes operated by the defendants adopted this model. The loans were typically structured so that lenders recovered the loan and interest out of profits made by the investment vehicle concerned to which the borrower concerned would otherwise be entitled.
- Under the schemes operated by the defendants, for every £100,000 invested the investor was offered a limited recourse loan of £276,000 making a total investment of £376,000. The whole of that sum, together with the sums invested by the other investors in the scheme, was then expended in the first year of the scheme. £26,000 was notionally attributed to partnership costs leaving a loss of £350,000. That attracted tax relief of £140,000. That sum exceeds by £40,000 the sum actually invested (the remainder having been borrowed on limited recourse terms) which had the effect of reducing the tax payer's tax payable in respect of all other activities by that amount. The hope was that the investor would obtain a return on his investment from the commercial exploitation of the films in which the LLP concerned invested but on any view that was likely to occur only some years after the initial investment had been made and tax relief obtained.
The facts relevant to these proceedings
- The schemes operated by the defendants were failures. HMRC decided that no allowances should be made available to investors following an investigation into the affairs of the defendants as a result of which it concluded that: (a) the partnerships concerned were not carrying on a trade; (b) the amounts spent by the partnership were not spent on allowable expenses; and (c) the real purpose and effect of the scheme was to carry out a tax avoidance scheme which sought to generate losses. HMRC based these conclusions in part on a finding that "the financial structure was circular and the mere circulation of money
does not create a trade or produce trading losses".
- The defendants appealed the decision of HMRC ("the tax appeal"). Those proceedings are currently stayed pending determination of the criminal proceedings to which I referred earlier in these proceedings. Some years ago, the first claimant was given access to some of the documents currently held by D5, including those in respect of which these proceedings have been brought, at a time when they were held by another firm of solicitors retained by the defendant to act on their behalf in relation to the tax appeal. His case is that the documents revealed for the first time that, contrary to the understanding of investors, the money they invested was not predominantly used for investing in films but was recycled through a network of companies and used to finance the limited recourse loans made to investors which made the scheme effective as a tax mitigation scheme. He maintains that the documents also reveal that a significant amount of the money invested was diverted offshore to entities controlled ultimately by one or more of Messrs. Hayley, Bevan and Savill and that there was little or no legitimate commercial activity. This has led the claimants and those they represent to fear that the schemes were a vehicle for fraud and conclude that the information necessary to enable them to plead such an allegation is or is likely to be contained in the documents that they wish to inspect and copy. The documents that the claimants seek are all those documents set out in exhibit CS4 to Mr Savill's witness statement. They are referred to hereafter collectively as "the Documents".
- The defendants do not object to the claimants inspecting and copying many of the documents held by D5. Those documents are however accounting materials that do not establish the points that concern the claimants. The Documents are described collectively in paragraph 36 of Mr Savill's statement as being:
i) Category I documents which are said to be draft documents, day to day correspondence, correspondence with HMRC in relation to civil tax enquiries, documents that relate to third parties rather than the defendants or to matters that pre-date the defendants' start of trading ("Category I documents");
ii) Category T documents that consist of documents prepared for the purposes of the tax appeal referred to earlier in this judgment or for the purpose of taking legal advice in respect of the structuring and operation of the defendants ("Category T documents"); and
iii) Category D documents being a large volume of documents on two CDs ("Category D documents").
- The defendants rely on the fact that Commercial Court proceedings were started by a number of investors including some who are represented in these proceedings. Those proceedings consist of claims commenced on various dates between 14 January 2009 and 21 October 2010. The Commercial Court proceedings did not get further than the issue and service of a claim form and these proceedings too are stayed until after the criminal trial has been completed. The Commercial Court claims are formulated as claims for breach of contract, negligence, and/or negligent misrepresentation or misstatement. They do not include allegations of fraud. It is submitted by the defendants however that the documents if disclosable at all should be sought by application for specific disclosure in the Commercial Court proceedings. This point is relied on as part of its answer to the Norwich Pharmacal application made against D5.
- Each of the defendants is governed by a different partnership deed. Those applicable to the first and second defendants are in similar form. Those applicable to the third and fourth defendants are similar to each other but different from those applicable to the first and second defendants.
- Each partnership had the same "Designated Members" ("DM") being LWF Management Services Limited and LWF Administration Services Limited. The deeds placed day to day management of the LLPs in the hands of the DMs. Each of these companies was controlled by Mr Bevan and Mr Savill. The claimants are "Individual Members" in the case of the first and second defendants and "Ordinary Members" in the case of the third and fourth defendants. As such they were not permitted to have and are not suggested to have had any involvement in the day to day management of the defendants, which in each case was the responsibility of the DMs.
- The schemes carried on by the defendants were unregulated collective investment schemes as I have said and as such were unlawful by operation of s.19 of the Financial Services and Markets Act 2000 unless operated in relation to regulated activities by an "Operator" who had permission to perform regulated activities. In relation to the first and second defendants this function was performed initially by WJB Chiltern Corporate Finance Limited. In relation to the third and fourth defendants the Operator initially was Partnership Incorporations Limited. Both Operators were replaced over time by other entities but the detail does not matter for present purposes.
- The claimants' case is that in practice the DM and Operator functions were carried out by Little Wing Films Limited, the company that sponsored the schemes carried on by the defendants, that was controlled by Messrs. Hayley, Bevan and Savill. The current position is that the defendants are controlled by Messrs. Bevan and Savill by reason of their control of the relevant DMs.
- The claimants maintain that they are entitled to inspect and copy the Documents by operation of Clause 5.4 of each of the partnership deeds or Clause 12.1 of the partnership deeds governing the first and second defendants and Clause 13.1 of the partnership deed governing the third and fourth defendants or Paragraph 2.6 of schedule 3 to the partnership deeds applicable to the third and fourth defendants or by operation of regulation 7(8) of the Regulations. I consider each of these submissions to the extent that it is necessary to do so in the next section of this judgment.
- The material part of Clause 5.4 provides:
"Subject to the rights of the Operator to operate the LLP as required by FSMA, the Designated Members are specifically authorised and empowered for and on behalf of the LLP to:
[The DMs shall] cause to be paid as soon as reasonably practicable any and all taxes, charges and assessments that may be levied, assessed or imposed upon any of the assets of the LLP, provided that, for the avoidance of doubt, the Designated Members shall have no authority or responsibility for the payment of taxes or the submission of tax returns on behalf of Individual Members, but shall supply to Members (prior to 30th September in respect of the end of the financial year ended 5th April) relevant information in their possession or under their control concerning the LLP and which is necessary for the administration of Members' personal tax affairs;"
- Clause 13.1 of the partnership deeds of the first and second defendant, and clause 12.1 of the partnership deeds governing the third and fourth defendants, are in identical terms and provide:
Books and Records
The books and records of the LLP, the Register, the annual financial statements of the LLP and a copy of this Deed shall be maintained by the Designated Members at the above address and shall be available to the Members and their duly authorised representatives for inspection at any and all reasonable times. The LLP may maintain such other books and records and may provide such financial or other statements as the Designated Members in their sole discretion deems necessary or appropriate."
Clause 12.2 and 13.2 provide for the DMs after the end of each financial year to send to the members a "financial report of the LLP, including a balance sheet and a profit and loss statement".
- Schedule 3 of the partnership deeds applicable to the first and second defendants sets out the role of the Operator. Paragraph 2.6 of schedule 3 provides:
"(a) The Operator hereby delegates to the Designated Members with power for the Designated Members to further delegate, but without affecting the Operator's duties under the Deed, responsibility for establishing the business objectives and policies of the LLP and for the supervision of the day to day business of the LLP.
(b) The Designated Members shall at all times keep the Operator and the Members fully informed of the activities and shall promptly supply such further general or specific information as the Operator and/or the Members may from time to time request."
The Construction Issues
The Legal Framework
- LLPs were a new form of legal entity created by the Limited Liability Partnerships Act 2000. ("LLPA"). The Regulations were made pursuant to s.15 LLPA. The law relating to partnerships does not apply to an LLP except as provided by the LLPA, another enactment or the Regulations see s.1(5) LLPA and s.5(1)(b) LLPA, and see F&C Alternative Investments (Holdings) Limited v. Francois Barthelemy and others  1 Ch. 613 per Sales J (as he then was) at . Thus, although it was submitted on behalf of the claimants that the effect of s.24 of the Partnership Act 1890, could be applied by analogy to LLPs and was that all partners were to have free access to all the books and accounts of the relevant partnership, in my judgment great caution needs to be exercised when attempting to extrapolate from the Partnership Act and authorities concerned with partnership in the traditional sense principles that can then be applied to LLPs.
- Reg. 3(1) of the Regulations applied the provisions of Part VII of the Companies Act 1985 ("CA85") to LLPs subject to the alteration of some of the terminology used in CA85. As a result CA85 s.221-222 applied substituting "LLP" for "company" and "member" for "officer" or "director". Those provisions as varied are to following effect:
"221(1) Every LLP shall keep accounting records which are sufficient to show and explain the LLP's transactions and are such as to (a) disclose with reasonable accuracy, at any time, the financial position of the LLP at that time, and (b) enable the members to ensure that any balance sheet and profit and loss account prepared under this Part complies with the requirements of this Act.
(2) The accounting records shall in particular contain (a) entries from day to day of all sums of money received and expended by the LLP, and the matters in respect of which the receipt and expenditure takes place, and (b) a record of the assets and liabilities of the LLP.
222(1) A[n] LLP's accounting records shall be kept at its registered office or such other place as the members think fit, and shall at all times be open to inspection by the LLP's members
(4) If a[n] LLP fails to comply with any provision of subsections (1) to (3), every member of the LLP who is in default is guilty of an offence and liable to imprisonment or a fine or both, unless he shows that he acted honestly and that in the circumstances in which the LLP's business was carried on the default was excusable."
CA85 applied at all times material to this dispute and both parties have made submissions by reference to it. CA85 has been repealed by and replaced with the Companies Act 2006 which contains provisions to similar effect as those cited above.
- Regs. 7(7) and (8) of the Regulations respectively provide:
"The mutual rights and duties of the members and the mutual rights and duties of the limited liability partnership and the members shall be determined, subject to the provisions of the general law and to the terms of any limited liability partnership agreement, by the following rules:
(7) The books and records of the limited liability partnership are to be made available for inspection at the registered office of the limited liability partnership or at such other place as the members think fit and every member of the limited liability partnership may when he thinks fit have access to and inspect and copy any of them.
(8) Each member shall render true accounts and full information of all things affecting the limited liability partnership to any member or his legal representatives."
It is common ground that these provisions are default provisions that apply subject to the provisions of the general law and to the terms of any limited liability partnership agreement. The claimants rely on Reg.7(7) as part of the factual matrix against which the clauses of the deeds to which I have referred above are to be read. They also maintain that they are entitled to the relief they seek by operation of Reg. 7(8) even if otherwise they are wrong in their contentions concerning the provisions within the deeds on which they rely.
The Clause 5.4 Issue
- It is submitted on behalf of the claimants that clause 5.4 imposes an obligation on the defendants to give the claimants access to and permit them to copy the Documents. It is submitted that there is no limit on the information to be supplied under that clause as long as it is in the possession or custody of the DMs, concerns the relevant partnership and access is necessary for the administration of a Member's personal tax affairs. The real issue between the parties in relation to this provision is as to scope of the phrase "
necessary for the administration of Members' personal tax affairs
". On behalf of the claimants it was submitted that this was a phrase that was a wide one whereas on behalf of the defendants it was submitted that in context all this provision was concerned with was the delivery of information to a Member that the Member requires in order to complete his, her or its tax return. It was further submitted on behalf of the defendants that all relevant tax returns were submitted many years ago and there are no further tax returns that any member needs to complete for which access to the Documents is required, not least because many years have now passed since the relevant losses arose and HMRC decided that the losses did not entitle tax payers to tax allowances.
- In my judgment the claimants are not entitled to access to the Documents by reference to clause 5.4. My reasons for reaching that conclusion are as follows.
- First, this provision has to be read in its statutory context. S.10 LLPA amends the Income and Corporation Taxes Act 1988, ("ICTA") so as to provide that a trade, business or profession carried on by an LLP shall be treated for tax purposes as having been carried on by the members of the LLP and not the LLP itself, and the property of the LLP shall be treated as if it was partnership property. The effect of this provision is to make members personally chargeable to tax for profits and other benefits obtained by the member concerned from the LLP of which he, she or it is a member and for chargeable gains made in respect of the LLP's property. Once that is understood then the purpose of clause 5.4 becomes clear.
- The clause gives effect to the amendments made to ICTA by s.10 LLPA by making clear that (a) the LLP's only tax payment obligation is to pay the tax payable by the LLP itself and (b) the DMs have no authority in relation to the submission of tax returns, or responsibility for the payment of taxes, on behalf of individual members. Clearly however, if individual members are to be responsible for submitting tax returns and paying tax relevant to gains and profits derived from the LLP concerned the member will need information from those charged with the everyday management of the LLP (the DMs) sufficient to enable the members to declare the gains and profits made. It is to that issue that clause 5.4(2) of the deeds is directed.
- The "relevant information" which is referred to in the clause is information "concerning the LLP" which a Member needs in order to pay taxes or complete a tax return. In my judgment this meaning is confirmed by the specified dates between which the relevant information is to be provided that is "
prior to 30th September in respect of the end of the financial year ended 5th April
". The phrase "
necessary for the administration of Members' personal tax affairs
" is not one of unqualified scope. Its scope is delimited by the phrase "
the payment of taxes or the submission of tax returns
" and in context has no meaning wider than one that imposes on the DMs the obligation to supply relevant information in their possession that is needed by a Member in order either to pay taxes or submit a tax return.
- It is not suggested by the claimants that the information is needed for the purpose of enabling members either to pay taxes or submit a properly completed tax return. The purpose of this application was made entirely clear by Mr Hilton in Paragraphs 83 and 95 of his witness statement in support of the application. It is brought because he, the other claimants and the members of the defendants whom they represent fear that the schemes were sold to them fraudulently and seek access to the material for the purpose of investigating whether a viable claim can be pleaded. As he puts it:
"83. In order for the Claimants and those we represent to understand and take informed advice on our position as members of the FDPs and to consider bringing proceedings to recover the money we were persuaded to invest, it is necessary for us to have access to the documents of the LLPs, particularly those which are held in connection with the Tax Tribunal Proceedings.
95. The Claimants are seeking access to the
Documents because we believe that they will cast considerable light on the structure which was established by those who set up and promoted the FDPs and the Scheme, how that structure was operated, which individuals and corporate entities were involved, and where the money paid into the FDPs has gone. They may also be relevant to the personal tax position of individual investors, some of whom otherwise face claims for repayment and penalties as a result of investing in what was believed to be a legitimate scheme."
- The closest that the claimants come to bringing themselves within the scope of clause 5.4(2) is with the final sentence of Paragraph 95 quoted above. However, that sentence is entirely speculative. Assuming without deciding that the clause is wide enough to cover information required in order to resist claims by HMRC for repayment, interest and penalties, it does not show that the Documents are necessary that is needed by any of the claimants or those that they represent for that purpose. Had it been it would have been easy enough to obtain evidence from one of the claimants or an investor represented by one of the claimants which explains why access to the material was needed for this purpose. In my judgment therefore, the claimants have failed to establish a contractual right to the Documents by reference to clause 5.4(2) of the partnership deeds.
The Clause 12/Clause 13 Issue
- The claimants' case is that this clause gives effect to what would otherwise be governed by Reg.7(7) of the Regulations; they submit that the phrase "books and records" should be construed as having the wide meaning that has been accorded to it in cases concerning limited partnerships and partnerships and that whatever books and records are in fact kept are books and records that the Members are entitled to inspect and take copies of. The defendants submit that, on a true construction of the clause, a distinction is drawn between the books and records referred to in the first sentence of the clause (which it is conceded the members are entitled to examine and copy at will) and the books and records referred to in the second sentence, which it was submitted members are entitled to have access to at the discretion of the DMs.
- In my judgment the construction for which the claimants contend is broadly to be preferred over that contended for by the defendants. My reasons for reaching that conclusion are as follows.
- The default position is set by Reg. 7(7). Thus the default position is that the books and records of a LLP are to be made available for inspection and every member of the limited liability partnership is entitled to have access to and inspect and copy any of them where that provision applies. This provision is reflective of the position that applies in relation to partnerships and limited partnerships to which the Limited Partnerships Act 1907 applies. I accept of course that whereas s.7 of the 1907 Act creates a default position in relation to limited partnerships that applies the Partnership Act, rules of equity and common law applicable to partnerships to limited partnerships, s.1(5) LLPA creates a default position to opposite effect in relation to LLPs. However that is subject to what is provided for in the Regulations. There is no reason why the Regulations should not import specific rules that apply to partnerships and limited partnerships. Indeed that is what is contemplated by s.1(5) and s.5(1)(b) LPPA. The purpose and effect of Reg.7(7) was to create in relation to LLPs precisely the same default position that applies to limited partnerships and partnerships. The default position created by the Regulations is of course subject to any contrary provision within the deeds governing the defendants see s.5(1)(a) LLPA.
- It is necessary to consider next the true meaning and effect of the words "books and records" when used in Reg. 7(7). I do not see any purposive or literalist reason (and none was suggested in the course of the hearing before me) for concluding that the phrase "books and records" used in Reg. 7(7) should be given any different meaning from that given to the phrase "
books of the firm
" in s.6(1) of the Limited Partnerships Act 1907. There is no proper basis for drawing fine distinctions between the meanings of such phrases in the absence of a clear purposive reason for drawing such a distinction essentially for the reasons identified by Norris J in Para. 23(i) of his judgment in Inversiones Friera SL v. Colyzeo Investors II LP  EWHC 1762 (Ch)  Bus LR 1136 ("Inversiones") - that is because there is no indication that the draftsman of the Regulations was "
consciously creating different categories of information to be recorded and accessed and different rights of inspection, examination and copying
" when he adopted the phrase "books and records" as opposed to the phrase used by the draftsman of the Limited Partnerships Act 1907.
- As to the meaning of that phrase, as Norris J said in Para. 23(k) of his judgment in Inversiones:
"What is required to fulfil such a general obligation will vary from case to case depending on the nature of the partnership business and its mode of conduct and the terms of the governing documents read in the light of current business practice. There is little to be gained by looking at the decided cases to see if they establish categories of document which as a matter of law every partnership must maintain as part of its records and which every partner has a right to inspect. The test is a functional one. As a rough rule of thumb, if it would be necessary or advantageous for CIM or Capital to rely on the document or record in order to establish the rights of the Partnership as against a third party, or in order to determine or adjust the rights of the partners inter se, then it is a "book, document or record" which relates to the affairs of the Partnership, and a limited partner is entitled to see it: and if the Partnership has paid for the document that would also establish that it related to the affairs of the Partnership (for why else would a fiduciary agent
charge the Partnership for it?).
The only qualification that Norris J identified was that he referred to in Para.23(r) of his judgment, which is in these terms:
"The only general restriction is that the documents and information relate to the business and prospects of the Partnership as it is. What might have been (offers that were unsuccessfully solicited, applications which failed, proposals that did not come to fruition, drafts that were subsequently altered) is not relevant to the current state and prospects of the Partnership and would not in my judgment be in principle open to inspection or copying; unless they were documents for which the Partnership paid because the cost of their preparation was treated as an operating expense of the Partnership (in which case the limited partners would be entitled to see what was done with the Partnership money)."
I consider that Reg. 7(7) accords the same rights to an ordinary member of an LLP in the absence of a provision to lesser or contrary effect in the deed governing the affairs of the LLP.
- It is against that background that it is necessary then to consider the effect of clause 12.1 and 13.1 in the various partnership deeds under consideration in this case. I say that because I accept the submission made on behalf of the claimants that these clauses are the means by which effect has been given to what would otherwise be governed by Reg. 7(7). I did not understand this proposition to be in dispute between the parties.
- The wording of the clauses was described by Mr Davis QC on behalf of the claimants in Paragraph 72 of his skeleton as being "not entirely felicitous". I agree. Even allowing for this factor however, I do not consider that Mr Knox QC, who appears for the defendants, is correct in his submission that the clause refers to two classes of "books and records" one of which has to be made available to ordinary members and the other of which does not. My reasons for reaching that conclusion are as follows.
- Although the clause is to be found in a section of the deed headed "Accounting" the defendants did not suggest that the effect of the subheading was to limit the scope of the clause to accounting books and records. On the contrary they submit that the clause covers both accounting books and records and other books and records. Their case is that accounting books and records falling within the scope of the CA85 referred to above are the books and records referred to in the first sentence of the clause and are the only books and records which the claimants are entitled to inspect as of right. Their case is that the books and records referred to in the second sentence are all other books and records which it is submitted that members are not entitled to access other than with the consent of the DMs.
- In my judgment, the opening sentence of the clauses establishes that the books and records of the LLP are to be available for inspection by members and their duly authorised representatives at any and all reasonable times. Had the clause ended there then the position would have been entirely clear. The clause would have followed Reg. 7(7) save that (a) it would have been wider by permitting inspection by authorised representatives of members and (b) narrower because it did not contain an express right for members or their representatives to copy the books and records of the LLP.
- The real question that arises concerns the effect of the second sentence of the clause. As I have said it says: "The LLP may maintain such other books and records and may provide such financial or other statements as the Designated Members in their sole discretion deems necessary or appropriate." It is submitted by Mr Knox that the reference in this sentence is to a second category of books and records that is different from those that are referred to in the first sentence. He submits that CA 1985 s.222(1) was applied to LLPs with certain modifications by Reg.3 of the Regulations. One relevant modification was that references to directors was to be treated as being a reference to members see Reg. 3(2)(b). Mr Knox submits therefore that the effect of s.222(1) and Reg. 3(2)(b) is to create a mandatory obligation to the effect that the accounting records shall at all times be open to inspection by members. I agree. However, I do not accept that this leads to the conclusion that the phrase "books and records" in the first sentence of the clause refers only to those records where there is such a mandatory right of inspection.
- In my judgment the correct construction of the clause requires it to be read as a whole. So read, the phrase "such other books and records" in the second sentence was intended to refer to books and records other than those referred to in s.222(1), the Register and the annual financial statements of the LLP. Further in my judgment each sentence of the clause was designed to address different issues. The first sentence was intended to address the right to inspect and the second was intended to address what books and records had to be maintained above and beyond that required by CA85 by giving the DMs the discretion to decide what books and records were in fact to be kept. Construed in this way the meaning of the clause is clear. What books and records other than those referred to in s.222(1), the Register and the annual financial statements of the LLP were maintained was a matter to be determined by the DMs in their sole discretion but whatever books and records they chose to maintain became subject to the entitlement of members and their authorised representatives to inspect set out in the first sentence of the clause.
- I reject Mr Knox's submission that the effect of the second sentence was to make disclosure of what is referred to discretionary. The words "
and may provide
" apply to the phrase that follows namely "
such financial or other statements
" and not to the phrase "such other books and records
" that precede it. Thus the second sentence creates two distinct discretions in favour of the DMs one that entitles them to maintain such books and records other than those referred to in s.222(1), the Register and the annual financial statements of the LLP as they in their sole discretion deemed necessary and appropriate and another that entitled them to provide such financial and other statements to members as in their sole discretion they deemed necessary and appropriate. However, whatever other books and records the DM's decided to maintain were nevertheless books and records of the LLP (they could not be anything other given that these provisions are contained in a deed by which the affairs of the LLP were governed and the discretion was one given to the DMs in their capacity as such) and thus became the subject of the right of the members to inspect set out in the first sentence of the clause.
- That being so, I consider that clause 12/13 in the deeds creates an express and unqualified right to inspect the books and records of the LLP concerned in favour of the members of the LLP concerned and their authorised representatives. I further consider that what are books and records for these purposes are those materials that satisfy the functional test identified by Norris J in Inversiones.
Discretion to refuse orders sought
- The defendants submit that if I came to the conclusion that there was in principle a contractual right to inspect and/or copy the documents, I should nonetheless refuse to grant the orders sought in the exercise of my discretion.
- It is first suggested that I ought to exercise my discretion by refusing the orders sought because the material was being sought for an illegitimate purpose namely for the purpose of bringing proceedings to recover money they invested. It is said that this is not in the interests of the LLPs as long as the tax litigation and /or the criminal proceedings are pending and/or is an illegitimate attempt to get round the fact that the Commercial Court proceedings are stayed. In my judgment these points are without substance.
- Clauses 12/13 are not subject to any express qualification concerning the purpose for which inspection is permitted such as is to be found in clause 5.4(2). In my judgment, subject to one qualification, why access is required by a member is immaterial. In my judgment the applicable principles are those set out by Norris J in Paragraph 25-27 of his judgment in Inversiones, which is in these terms:
"25. There is one further matter of principle to be addressed.
that the mounting of litigation is not a legitimate purpose for which to seek the inspection of documents or the provision of information.
26. In my judgment the question of motive or purpose is irrelevant to the exercise of a statutory right of access to the partnership books...
27. I would accept that the position may be different in relation to the exercise of a contractual or other non-statutory right. There, if it is absolutely clear that the partner is using a contractual right to obtain partnership documents not for the purpose for which it is expressly or implicitly conferred (in connection with his interests as partner) but for the purpose of injuring the partnership, or for some other manifestly improper purpose, then the Court will not assist the partner to exercise the right to access partnership books, records and information: compare Oxford Legal Group Limited v Sibbasbridge Services Ltd  EWCA Civ 387 at . But that principle can only apply in very plain cases: otherwise (as Slade J pointed out in Conway v Petronius Clothing Limited  1 WLR 72 at 90E) a right of inspection could be rendered more or less nugatory by specious allegations that it was being exercised with intent to injure or for some other improper motive. The principle has no application here. It is simply not the law that if a partner thinks he may have grounds to complain about the way a general partner (or its delegate) has performed its obligations then the partner thereby loses any right to obtain access to partnership documents."
- There is no purposive or other reason for thinking the position is or should be any different simply because the question arises in relation to a LLP as opposed to a limited partnership. Even if it is accepted that the essential characteristics of an LLP are closer to those of a company than a partnership or limited partnership, that does not lead to such a conclusion. Indeed, the authorities to which Norris J refers to in Para. 27 of his judgment in Inversiones both concerned limited companies. In those circumstances, in my judgment it would be an entirely impermissible exercise of discretion to refuse orders in aid of a member's exercise of contractual rights to inspect on the basis that the member concerned was exercising those rights in the hope or expectation that he would thereby obtain material that would support a claim against the DMs of an LLP.
- It was suggested that any claim that the claimants or the members they represent could hope to mount would be statute barred. If and to the extent that is relied on as a basis for refusing relief I reject it. It may be that if the material to which the member obtains access supports a claim that is plainly statute barred then the member will not ultimately incur the costs of commencing proceedings or of risking becoming liable for the costs incurred by a defendant to such proceedings. If such a claim is commenced that is statute barred then the defendant to those proceedings has the remedy that the law makes available in such circumstances. That any such claim may be statute barred is not a reason for refusing access to documents to which the member has a contractual entitlement however.
- I do not accept that to permit access for the purposes identified by the claimants is contrary to the interests of either the LLPs or the members of the LLPs other than those represented by the claimants in these proceedings. First, I do not accept that it would be a proper exercise of discretion to refuse members access to documents they have a contractual entitlement to see on the basis suggested. Secondly there is no evidence from any ordinary member that asserts opposition to the application. The application is opposed by the LLPs acting by their DMs and the evidence in answer is provided only by Mr Savill. Thirdly, if and to the extent that proceedings are started by some or all of the claimants or those they represent alleging fraud and if proceeding with such claims was thought to be prejudicial to the defendants in the criminal proceedings then if so advised an application for a stay of any such proceedings could be applied for. It is not a reason for precluding the claimants from exercising their rights to inspect. Fourthly, I do not accept that it is correct to describe the claimants' exercise of their contractual right to inspect as an "
illegitimate attempt to get round the consequences of the stay
" of the Commercial Court proceedings as Mr Knox puts it in Para. 63(4) of his skeleton submissions. As I have said, if further proceedings are commenced alleging fraud (something specifically not alleged in the Commercial Court proceedings) and if otherwise it is appropriate for any such proceedings to be stayed then an application can be made for a stay of such proceedings at that stage. It does not justify precluding the members of the LLPs from exercising their contractual rights to inspect. If further proceedings are started, the question whether they are vexatious, or whether they should be transferred to the Commercial Court and consolidated with the proceedings currently pending in that court or vice versa are issues than can be considered if and when further proceedings are started.
- Although it is suggested that the claimants have delayed in bringing this application, again I consider that to be an impermissible basis on which to refuse to enforce the contractual rights of members to inspect the books and records of the LLPs of which they are members. The contractual right to inspect is not qualified by references to any time related questions. It was suggested in the course of the hearing that at least some of the LLPs have come to an end by effluxion of time. However it was not submitted on behalf of the defendants that the right to inspect ended with the coming to an end of the LLP. Such a submission would have been erroneous because the expiry of the Term as defined in Para.2.4 of the Deeds merely governs the carrying on of the Business as defined see clause 2.1 of the deeds.
- Finally it is suggested that the category T documents are privileged. Mr Knox accepted in Para. 63(5) of his skeleton submissions that this point was not a "conclusive" answer to the application. In reality it is not an answer at all. Just as shareholders are entitled to see material that is privileged in the hands of a company of which they are a shareholder, so in my judgment are members of LLPs. The general principle as it applies to shareholders was assumed in Woodhouse & Co v. Woodhouse (1914) 30 TLR 559, was stated by Simonds J (as he then was) in Dennis & Sons Limited v. West Norfolk Farmers Manure and Chemical Cooperative Company Limited  1 Ch 220 at 222 and has been applied consistently ever since as was demonstrated by Evans-Lombe J in CAS (Nominees) Limited v. Nottingham Forest plc and others  BCC 145 at -. There is no justification for treating the members of LLPs any differently from shareholders of limited companies in this context and none has been suggested. In those circumstances, I do not accept that privilege is material. Had the exception to the rule identified in Woodhouse & Co v. Woodhouse (ante) applied then that would have been an answer to the application but it does not apply.
- There are three issues that remain. The first is that the clauses I am now considering provide for inspection but not expressly copying. I am conscious of the fact that I have heard no argument from the parties on this point so I intend to say no more about it other than to invite the parties to address me on the issue at the handdown of this judgment when the question can be considered and if necessary a further judgment can be given in relation to the issue.
- The second issue is that the records of the defendants have become mixed up over time. Given that one firm of solicitors acts for all the claimants and clauses 12/13 permit not merely members but their authorised agents to inspect, this may not be an issue. However, I have not heard argument about it. It is an issue that can be further addressed if necessary at the hand down hearing.
- The final issue concerns which documents come within the scope of the definition of books and records that I have held should apply. Again I have heard no argument on this issue the arguments of the parties were advanced as a matter of principle. In the period between delivery of this judgment to the parties in draft and the date of its handdown, they should endeavour to agree which of the documents listed in the Appendix to this judgment come within the scope of the definition of books and records set out above. If and to the extent that agreement cannot be reached, I will have to decide the question in relation to those documents where there continues to be a dispute. Whether that can be determined at the hand down of the judgment or will require determination at a further hearing will depend on the number of documents in dispute. However, even if that issue cannot be determined finally at the hand down of this judgment, directions can be given for determination of the issue in relation to specific documents at that stage.
The paragraph 2.6 of schedule 3 and Regulation 7(8) Issues
- In light of the conclusions that I have reached so far, it is not necessary that I consider these issues. In summary however, I would have accepted the submission made on behalf of the defendants in relation to both these alternatives. In my view it is clearly correct that the scope of paragraph 2.6(b) is limited to the provision relevant to the powers referred to in sub-paragraph (a) and I think Reg.7(8) is of no application to a claim for access to documents for the purpose of inspecting and copying them. In any event, I think it likely that it would have to be read subject to clause 12/13 in any event, even if it was capable of extending to inspection and copying.
The Norwich Pharmacal Application
- In light of the conclusions I have reached so far it is not necessary that I determine that application either. However, in case I am wrong in the conclusions that I have reached concerning the effect of clauses 12/13 I set out my conclusions in relation to that application albeit briefly.
- The claim as pleaded is set out in B 7-11 of the details of the Part 8 Claim. The claim is premised on the basis that the claimants have an arguable case that the partnerships were used as vehicles for a fraud upon them. This part of the claim is advanced exclusively against D5 and is advanced against it on the basis that "
it is an innocent party which appears to have become mixed up in the tortious acts of others
- The origin of the jurisdiction is the statement of principle contained in the speech of Lord Reid in Norwich Pharmacal Co v. CEC  AC 133 at 175. However the key qualification in relation to the jurisdiction was set out by Lord Reid at 174 in these terms: "It is not available against a person who has no other connection with the wrong than that he was a spectator or has some document relating to it in his possession". The reason why the respondent in those proceedings was treated differently was because "
without certain action on their part the infringements could never have been committed". It was these qualifications that led Lord Reid to formulate the principle that the claimants seek to rely on in this case in these terms: "
if through no fault of his own, a person gets mixed up in the tortious acts of others so as to facilitate their wrong doing he may incur no personal liability but comes under a duty to assist the person who has been wronged by giving him full information
" However, as Lord Reid said in Norwich Pharmacal, "
information cannot be obtained by discovery from a person who will in due course be compellable to give that information
on a subpoena duces tecum
". Hence the remedy, which is an exceptional procedural device made available to avoid injustice, is available only against those who won't, or are unlikely to, be liable for the wrong but have nevertheless become mixed up in its commission. Outside that limited class the remedy is not available.
- Aside from the need to demonstrate that the person against whom the remedy is sought has become mixed up in the wrongful conduct of others in the sense described by Lord Reid, the remedy will not be granted unless the court concludes that it is a "necessary and proportionate response in all the circumstances" see Ashworth Hospital Authority v. MGN Limited  1 WLR 2033. Norwich Pharmacal applications are not a means by which wide-ranging discovery can be obtained and orders are strictly confined to the disclosure of information necessary to enable a party to plead a case against the actual alleged wrong doer.
- It does not have to be the remedy of last resort for obtaining such information but demonstrating that there are other available remedies that do not involve intruding into the business of third parties who by definition are innocent participants is likely to be a powerful factor in deciding whether the order sought is necessary and proportionate. However it is only one of a number of factors that are likely to be relevant in most cases. Those most likely to be relevant in most cases were set out by Lord Kerr in RFU v. CIS Limited  UKSC 55  1 WLR 3333 at . They included:
i) The strength of the possible cause of action identified by the applicant for the order;
ii) The strong pubic interest in allowing an applicant to vindicate his legal rights;
iii) Whether making an order will deter similar wrong doing in the future;
iv) Whether information could be obtained from another source;
v) Whether the respondent was aware or ought to have known that he was facilitating arguable wrong doing; and
vi) The degree to which the material sought is confidential.
- Against that background I turn to the facts of this case. It is first necessary to establish that the respondent is "mixed up" in the wrong doing that it has innocently facilitated the commission of the alleged wrong doing. It is difficult to see how D5 can properly be said in this sense to be mixed up in the alleged wrong doing of the individuals who stand behind the defendants or any other individuals who might have been involved in devising or operating the alleged fraudulent scheme. D5 was instructed to conduct the tax appeal brought by the defendants long after the relevant events had occurred. In this regard it is pertinent to note that HMRC's closure notice at the end of its investigation is dated 29 June 2007. The appeal was launched shortly thereafter at a time when the defendants were represented by solicitors other than D5. The solicitors with conduct were replaced by another firm in 2010 and D5 was the third firm instructed sometime between 9 June and 13 October 2010. No work has been carried out by D5 since April 2013 and the retainer has been terminated. It is difficult to see how D5 could be described as being mixed up in the alleged wrong doing in any relevant sense at any date between the date when the Documents came into their possession and the date when their retainer was determined. D5 in truth has no connection with the wrong other than by having in its possession documents that (might) relate to it. It was submitted that the appeal was part of the fraud. I do not accept that analysis. The appeal was brought on the advice of professionals and would have been determined long ago but for the stay. The stay is the result of the criminal proceedings.
- Leaving to one side the question whether D5 can be said to have been mixed up in the alleged frauds in these circumstances, I turn next to the question of necessity. The hypothesis that applies at this stage is that the claimants are not entitled as a matter of contract to access to the relevant material. On the basis that the defendants are likely to be parties to any fraud claim, then there is an alternative remedy available namely to apply for disclosure against the defendants under CPR r. 31.16. However, before an application under that rule can succeed the applicant must be able to show that both the applicant and the respondent are likely to be parties to subsequent proceedings. Quite what the nature of the "fraud" claims will be, and against whom it is thought those claims will be brought, has not been spelt out by the claimants. It was at one stage suggested that the claims that would be brought were for deceit. If that is so then it is not at all obvious that they would be brought against the defendants. As I have said, the Commercial Court proceedings to which I referred earlier are formulated in negligent misrepresentation. It is a notable feature of the Commercial Court proceedings that the defendants are not named as defendants.
- However, if an application under CPR r. 31.16 cannot succeed that does not lead to the conclusion that the present application should succeed. It is likely to mean that any Norwich Pharmacal application should have been brought against the defendants not D5. This is all the more significant because D5 are solicitors who received the Documents in their capacity as such. This last factor gives rise to great difficulty at least potentially see United Company Rusal Plc and others v. HSBC Bank Plc  EWHC 404 per Tugendhat J at   - for the policy reasons identified by Henderson J in JCT BTA Bank v. Solodchenko  EWHC 2163 (Ch)  Ch 1 at  to . This is a problem that it would be wholly unnecessary to grapple with if either an application had been brought against the defendants under CPR r. 31.16 if and to the extent that the defendants were likely to be parties to the subsequent proceedings or any Norwich Pharmacal application had been brought against the defendants, who are the principals and clients to whom D5 answers as agent and solicitors.
- This is a case where the claim that D5 is mixed up in the relevant wrong doing is at best tenuous in the extreme, where the information sought could be obtained much more straightforwardly by either an application against the defendants brought pursuant to CPR r.31.16, or under the Norwich Pharmacal procedure, and where the ramifications of making orders of this sort against a solicitor could clearly have been avoided by the claimants taking one of those two courses. I say nothing about whether I would have granted the application had it been made against the defendants since it is possible that such an application may be made at some stage in the future.
- For the reasons set out above, I conclude that:
i) The claimants are entitled to inspect the Documents the subject of these proceedings whether by themselves or their authorised agents to the extent that they are books and records in the sense set out above of the defendant of which they are members by operation of clauses 12 and 13 of the various deeds; but
ii) The application for Norwich Pharmacal disclosure fails.
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